Labor market effects of outsourcing under industrial interdependence

The consequences of international outsourcing in traditional models of trade are already well understood. However, with regard to empirical research there seem to be still some important shortcomings. Empirical studies on the labor market effects of outsourcing are mainly based on the same techniques that have been used for years. In terms of the adopted econometric specifications, one assumption is typical and - as we will show - critical in this regard. Practically all studies we are aware of assume independence between industries and neglect any spillover and feedback effects across industries. In fact, this is at odds with multi-sector general equilibrium models of trade. It is this paper's focus to relax this restrictive assumption and to suggest the use of different econometric methods. We consider national input-output linkages and cross industrial flows of workers as two important channels of inter-industrial spillovers in labor market effects. We focus on these transmission channels in an Austrian panel data set of 21 two-digit industries in the 1990s and find that industrial interdependencies induce a multiplier effect for changes in industry-specific variables such as international outsourcing. Disregarding spillover effects, therefore, leads to a substantial underestimation of the labor market implications of international outsourcing.